Wal-Mart raises specter of first-quarter earnings miss

NEW YORK (MarketWatch) — Wal-Mart Stores Inc. shares ranked as the biggest decliner among Dow Jones Industrial Average components on Tuesday, retreating as investors reacted to the retail giant’s financial outlook and fourth-quarter results.

However, the company gave a first-quarter profit and full-year outlook range that suggested it may fall short of Wall Street expectations, citing in part its view of the global economy. The company also placed top priority on returning sales trends in the U.S., its largest market, to positive territory. Read “Wal-Mart’s fumble at home.”

Chief Executive Mike Duke said the company was pleased with fourth-quarter and full-year performance in all three of its “operating segments.”

At the same time, he said, the company was disappointed by domestic sales in the quarter, with pricing and merchandising issues running “deeper than we initially expected.” Those, he said, “require a response [whose results] will take time to see.”

An 11% increase in its inventory was also a concern among investors, analysts said.

“There’s little [Wal-Mart] can do quickly to drive shares higher as they struggle to define a new strategy,” said Deutsche Bank analyst Bill Dreher in a report. Fourth-quarter results came in “mixed as expense management offset (sales) weakness at the core Walmart U.S. business.”

The company’s fourth-quarter profit rose to $6.06 billion, or $1.70 a share, from $4.76 billion, or $1.25 a share, a year earlier. Sales in the three months ended Jan. 31 rose 2.5% to $115.6 billion, while membership and other income declined 4.5% to $760 million, the Bentonville, Ark.-based retailer said.

Excluding tax benefits of 7 cents a share and other one-time items, the company said it would have earned $1.34 a share. Analysts, on average, estimated Wal-Mart would earn $1.31 a share on sales of $117.5 billion.

The company also forecast first-quarter profit of 91 cents to 96 cents a share and full-year earnings ranging from $4.35 to $4.50. It also cut its capital-spending outlook, saying it was likely to spend up to $13.5 billion, compared with an October projection that ran as high as $14.5 billion.

The consensus of analysts surveyed by FactSet Research had been for a profit of 96 cents a share for the first quarter and earnings of $4.45 a share for the just-begun fiscal year.

Lagging U.S. rivals

In the fourth quarter, U.S. sales at the namesake Walmart unit fell 0.5% to $71.1 billion. They dropped 1.8% on a comparable-store basis, missing the company’s own projection.

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Sales generated in the Walmart chain have been hurt in part by the company’s decision to take out some of the products that had been alienating shoppers and by its rollbacks — temporary price cuts — analysts have said.

The company said on Tuesday many of the problems stemmed from merchandise assortment and presentation issues that led to customer traffic declines.

By categories, the decline was led by weak demand for general merchandise, including price deflation in electronics, Wal-Mart said. Consumables, home goods and apparel sales also were down, offset by gains in food and health and wellness items. The company said customers are buying clothes closer to when they need them.

Management said it plans to focus on everyday low prices on a basket of goods, feature the broadest assortment possible, remodel Walmart stores and focus on online selling to spur sales in the U.S. The company also said it’s moving forward “with greater urgency” in opening small stores and said it’s been “encouraged” by the responses in urban markets like Chicago, Washington, D.C., San Diego and New York.

“It ultimately underscores the severity of the pricing and merchandising challenges facing the world’s largest retailer,” said Wall Street Strategies analyst Brian Sozzi. “Things do not change overnight for a company the size of Wal-Mart.”

Outside of the U.S., sales rose 8.9% to $31.4 billion and would have been up 6.6% with currency-exchange impacts. Demand was driven by Brazil, Mexico and China, the company said.

“While the company continues to struggle in the U.S. and in apparel specifically, the international segment should remain a solid growth driver and we believe [same-store sales] will turn positive by [the second half of the year], driven by a return to price leadership and right-sizing its stores, and an external tailwind related to inflationary pressures,” said Lazard Capital Markets analyst Todd Slater.

Sam’s Club sales rose 4.4% to $13.1 billion and would have been up 2.5% excluding fuel sales.

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